Related Search

Hot and bothered – Looking too often at portfolio performance can be counterproductive

23/01/2015

Ian Kelly

Fund Manager, Equity Value

It was only a matter of time before somebody made the connection between the marshmallow test and retirement planning. After all, when you think about it, the test is all about delaying instant gratification in the pursuit of some future benefit – and of course that is what anyone who pays into a pension is effectively doing.

As we noted in Sweet success, the marshmallow test was an experiment developed in the US in the 1960s by Professor Walter Mischel. In short, toddlers were told they could have one sweet immediately or two if they waited 15 minutes. In the decades since, Mischel has gone on to demonstrate a noticeable correlation between his subjects’ ability to delay gratification and success in later life.

In an interview with the Financial Times towards the end of last year in connection with his latest book called – what else? – Marshmallow Test, Mischel explained our ability to delay gratification is linked to what are known as the ‘hot’ and ‘cold’ systems of the brain. The former urges us to scoff the marshmallow while the latter helps us to work through why there could be benefits in holding fire.

“The hot system is great when you’re starving in the wild and looking for food,” Mischel told the FT. “It’s not good when you’re doing retirement planning.” Interestingly, it appears some wealth managers have begun to take note of what the marshmallow test and similar psychological studies might indicate about the decision-making abilities and, as the article puts it, “investment proclivities” of their clients.

But what really caught our eye was a line from the journalist after he had taken an abbreviated version of one of these wealth managers’ behavioural tests to measure his risk tolerance and composure. Though “not overly concerned” with short-term fluctuations in his wealth, he learned he may end up taking on less risk than he felt comfortable with “because you watch your portfolio too closely”.

The idea that looking too regularly at portfolio performance can be counterproductive and actually prevent investors from taking on an appropriate level of risk – and thus from achieving the returns they might otherwise have seen over the longer run – is very much in keeping with the views outlined by The Value Perspective in articles such as Alternative reality and Active service.

Happily for anyone who may have misgivings about their levels of self-restraint, the FT article says Mischel’s research suggests “individuals are quite capable of changing their ability to exert self-control, by using techniques that help to douse the insistent, immediate demands of the ‘hot’ system”. The trick, apparently, is to imagine how the outcomes of instant and delayed gratification might differ or, as Mischel puts it, “to find ways of making self-control less effortful”.

Author

Ian Kelly

Fund Manager, Equity Value

I joined Schroders European equity research team in 2007 as an analyst specialising in automobiles. After two years I added the insurance sector to my coverage. In early 2010 I moved into a fund management role, and then took over management of two offshore funds investing in European and Global companies seeking to offer income and capital growth.

The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.

They do not necessarily represent views expressed or reflected in other Schroders' communications, strategies or funds. The Team has expressed its own views and opinions on this website and these may change.

This article is intended to be for information purposes only and it is not intended as promotional material in any respect. Reliance should not be placed on the views and information on the website when taking individual investment and/or strategic decisions. Nothing in this article should be construed as advice. The sectors/securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy/sell.

Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Contact Schroders

Schroders is a world-class asset manager operating from 35 locations across Europe, the Americas, Asia, the Middle East and Africa.

Important Information

This website is for UK professional financial advisers only. Retail clients should not proceed onto the site.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past Performance is not a guide to future performance and may not be repeated.

You should not rely on the views and information on the site when making investment decisions. The material is not intended to provide, and should not be relied on for accounting, legal or tax advice.

Views and Opinions are Schroders' only and may change.

Schroders uses all reasonable skill and care to ensure information is accurate. However, errors or omissions may occur that are outside of our control, such as unauthorised access to this internet service, or the effects of machine, software or operator error or malfunction in connection with data transmission. Information is accurate only on the date shown on the page it appears and we advise that you contact us before you rely on any information to confirm its accuracy.

Schroders uses cookies to personalise and improve your site experience. You can accept all cookies by selecting 'I agree' and continuing to browse the site or you can "Manage cookies" to apply only the categories of your choosing. Find out more details on how we use your information in our Cookie Policy.